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Today, Shanghai; Next Up, Toronto

Bloomberg BNA’s first
transfer pricing conference in Asia—the latest offering in our Global Transfer
Pricing Conference series with Baker & McKenzie—could not have been better
timed. The day the conference opened, Sept. 17, China issued a revised draft
circular on transfer pricing that completely changed the game for multinational
companies operating in the country. Bloomberg BNA was there to capture the
earliest possible comments on the guidance from government and private sector
experts.

China’s top international tax
official, Liao Tizhong, set the stage with his opening keynote, where he made
the case for changing a global tax system that Chinese officials believe favors
rich countries. Current international tax rules, he said, place too much
emphasis on contributions like intellectual property, which tend to come from
wealthier countries, and not enough emphasis on characteristics like a country’s
ability to produce products cheaply.

Other conference sessions
took an in-depth look at the circular, which implements many aspects of the
OECD’s ambitious project to combat base erosion and profit shifting (BEPS).
Stig Sollund—coordinator of the United Nations tax committee's transfer pricing
subgroup—noted that China and India's involvement in the BEPS project “have
brought new ideas and perspectives into the discussions that may be challenging
orthodox interpretation of international rules.” Specifically, the new circular
introduces a new transfer pricing method that allocates the combined profits
among related parties by analyzing how much they contribute to value creation.
Importantly, Glenn DeSouza of Baker & McKenzie in Shanghai said, this means
that traditional transfer pricing methods that rely on an analysis of
comparable transactions will no longer be acceptable—and that China is likely
to wind up with a bigger slice of global tax dollars as a result.

A huge issue going forward will be how to
bridge the gap between China’s new approach and the U.S. approach, which favors
the traditional, comparables-based analysis. In remarks that were startlingly
prescient given that they were recorded in advance of the event, Robert Stack,
U.S. deputy assistant Treasury secretary for international tax affairs, offered
a way forward in U.S.-China tax disputes, which usually involve a U.S.
multinational and a Chinese subsidiary: focusing on the functions, assets and
risks in the jurisdiction. Under this approach, he said, in some cases the transfer
pricing analysis will lead to a “routine” return—that is, relatively little
income—for the Chinese entity, and in other cases it will lead to different
kinds of returns.

There is no doubt among those in the international
tax world that the BEPS project will lead to a huge increase in double-tax
disputes. Other sessions discussed the varying levels of effort—and
ability—among Asian countries to cope with the influx. Japan and South Korea
are seen to have smoother processes in place than, for example, Indonesia and
Vietnam.

Meanwhile, an Australian tax official
answered the criticism leveled at the country for its recent moves to combat
multinationals’ tax avoidance—some of which were perceived as going beyond the
parameters of recommendations coming out of the BEPS project. Mark Konza,
deputy commissioner international of the Australian Taxation Office, described
the country’s approach—which doubles the penalties for companies in some instances,
as “very moderate” and harking back to traditional tax laws that require tax to
be paid “in the place where the economic activity is taking place.”

The conversation will continue with the
Bloomberg BNA and Baker & McKenzie Global Transfer Pricing Conference in
Toronto October 14-16. Just as people
attending the Shanghai event heard the first discussion of China’s new
circular, those at the Toronto conferences will hear some of the earliest
in-depth analysis of the OECD’s final BEPS guidance, to be issued Oct. 5, by
experts from the OECD, the U.S. government and the private sector.

For more information and the full agenda for the Toronto Transfer Pricing Conference click here.

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